The case of
Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltdi.
addresses the question regarding the stage at which the borrower can redeem the mortgage of a security created with a bank. The case has arisen as an appeal challenging the order of the Bombay High Court allowing the redemption of mortgage due to a private agreement between the Bafna Motors (Mumbai) Pvt.Ltd. (“Borrower”) and Union Bank of India (“Lender”)
The facts of the present case are such that the Borrower had availed a loan from the Lender which was sanctioned by the Lender through a Lease Rental Discounting (“LRD”) to the amount of INR 1,00,00,00,000 (Rupees Hundred Crores Only) in favour of the Borrower. Out of the total amount sanctioned, the amount to the extent of INR 65,00,00,000 (Rupees Sixty-Five Crores Only) was adjusted against the then existing LRD facility granted by a previous bank and the balance of INR 35,00,00,000 (Rupees Thirty-Five Crores Only) a security in the form of a simple mortgage created over a parcel of land in lieu of the sanctioned amount (“Mortgaged Land”).
There was a default in repayment of the loan by the Borrower and thus, the account was declared NPA by the Lender. Subsequently, the Lender sent a notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI”) for repayment of the principal amount and the interest amount aggregating to INR 1,23,83,00,000 (Rupees Hundred and Twenty-Three Crores and Eighty-Three Lakhs Only). However, the Borrower failed to pay the said loan amount and the Lender proceeded to take possession of the Mortgaged Land and put it to auction.
Pursuant to the publication of the auction notice in June 2023, Celir LLP (“Appellant”)emerged as the highest bidder offering INR 105,50, 00,000 (Rupees Hundred and Five Crores and Fifty Lakhs) for the Mortgaged Land. The Appellant was then granted the sale confirmation letter dated 30 June 2023 calling upon to deposit 25% (twenty-five percent) of the bid amount by 01 July 2023 and the balance amount by 15 July 2023. The Appellants complied with the same and deposited 25% (twenty five percent) of the bid amount on 01 July 2023.
However, the Borrower filed an interim application before DRT, Mumbai Bench for redemption of mortgage by payment of the total outstanding amount. Awaiting the orders of the DRT, the Borrower approached the Bombay High Court seeking redemption of the Mortgaged Land through payment of total amount of INR 1,29,00,00,000 (Rupees Hundred and Twenty-Nine Crores Only). Hence, the Lender expressed its willingness to accept the offer of the Borrower. The Bombay High Court decided in favour of the Borrower and permitted the redemption of the mortgage.
Aggrieved by the order of the Bombay High Court the Appellant filed an appeal before the Hon’ble Supreme Court.
The Supreme Court analyzed the provisions of SARFAESI specifically the amended Section 13(8), according to which, if the borrower succeeds to repay the principal amount along with the interest and other additional charges before the publication of the auction notice,then the borrower can exercise the right to redemption of the mortgage. The amended provision states as follows,
“(8) Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease, assignment or sale of the secured assets: -
(i)the secured assets shall not be transferred by way of lease assignment or sale by the secured creditor; and
(ii)in case, any step has been taken by the secured creditor for transfer by way of lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets.”
[ Emphasis Supplied ]
Prior to the amendment of Section 13(8) in 2016, the provision stated that the borrower repays the principal amount along with the interest and charges at any time before the date fixed for sale or transfer, the secured asset shall not be transferred. This provision was in consonance with Section 60 of the Transfer of Property Act which stated that the right of redemption of mortgage exists till the time the property has not been conveyed/transferred. Thus prior to the amendment the right of redemption of mortgage existed till the transfer of the property to a third party.
In pursuance of the above amended provision, the Supreme Court stated that failure on part of the Borrower in tendering the entire dues before the publication of the auction notice by the Lender leads to an extinguishment of the right of redemption of mortgage. Therefore, the order of the Bombay High Court is in contravention to this provision as the order allowed the Borrower to redeem the mortgage post the auction of the Mortgaged land
[ Emphasis Supplied ]
In order to understand the right of redemption, the provision of Section 60 of the Transfer of Property Act, 1882 should be analyzed wherein the stage at which the mortgaged property can be redeemed has been enumerated. The section states that the right of the mortgagor to redeem the property exists till the said property has been transferred or conveyed to a third party. The same has been held by the Supreme Court in the case of Narandas Karsondas v. S.A. Kamtam and Anrii. stating that “The mortgagor's right to redeem will survive until there has been completion of sale by the mortgagee by a registered deed.” It has to be noted that this position of Section 60 of the Transfer of Property Act, 1882 was applicable to the proceedings under SARFAESI until the amendment.
Post the amendment of Section 13(8) the SARFAESI in 2016, the right to redemption extinguishes post the publication of auction notice. The Supreme Court stated that “prior to the amendment, Section 13(8) retained the right akin to Section 60 of the Transfer of Property Act, 1882. By amendment there was a conscious departure by the legislature.” Through this departure, there is an inconsistency between the two laws which is fulfilled by the supremacy of SARFAESI being the special law over the Transfer of Property Act, 1882.
SARFAESI has incorporated the interests of the auction purchasers, borrower and banks, thus it is the duty of the courts and judicial authorities to protect the sanctity of all the parties and the auction proceedings under the law. The court further cited the case of Valji Khimji and Company v. Official Liquidator of Hindustan Nitro Product (Gujarat) Ltd. and Orsiii. and K. Kumara Gupta v. Sri Markendaya and Sri Omkareswara Swamy Temple and Orsiv to state the following:
“83. ……Once an auction is confirmed the same can be interfered on very limited grounds as otherwise no auction would be complete.
84…... repeated interferences with public auction would frustrate the sanctity and purpose of holding auctions.”
Based on the above reiteration of the Supreme Court it can be observed that all the parties are equally bound by the provisions of the law. The interpretation of the Bombay High Court goes against the understanding of Section 13(8) of SARFAESI. A bare reading of the section leads to the understanding that the stage at which the mortgage can be redeemed is prior to the publication of the auction notice.
The Supreme Court in this case allowed the appeal of the appellant auction purchaser to hold that the High Court of Bombay was not justified in allowing the redemption of the mortgage at such an advanced stage of the auction-sale. The conduct of the Lender in not issuing the sale certificate in favour of the auction purchaser despite receiving the bid amount was against the scheme of law and in contravention of the above stated judgements.
Thus, based on the analysis of the case it can be concluded that pursuant to amendment of Section 13(8) of SARFAESI an inconsistency aroused between the position of redemption of mortgage under the SARFAESI and Transfer of Property Act, 1882. However, the Supreme Court in this judgment has settled the position of law by reiterating that SARFAESI being the special law would prevail over the Transfer of Property Act, 1882.